MNI INTERVIEW: BOE Needs To Speed Up, Vary QE-NIESR Economist

The Bank of England may have to accelerate the pace of its quantitative easing and extend purchases beyond gilts if it wishes to increase stimulus as increasing the volume of QE provides diminishing returns, National Institute of Economic and Social Research senior economist Corrado Macchiarelli, told MNI.

While the BOE is expected to announce an expansion of its QE programme on Thursday, it may also need to step up the speed of purchases, which have slowed from GBP13.5 billion a week in March to just GBP4.5 billion a week now, or else broaden them to assets such as equities, Macchierelli said in an interview.

The lesson from the BOE's experience in March, when markets froze, was that "The pace of the purchase really mattered. The growth rate of those purchases was very relevant as opposed to the level itself," he said.

FLOW OR STOCK

Some BOE monetary policy committee members including Gertjan Vlieghe have also expressed concern that the added stimulus power from expanding the size of asset purchase programmes was diminishing, but Deputy Governor Ben Broadbent said in June that gilt stock mattered more than flow. Deputy Governor Dave Ramsden said Oct. 23 that the Bank could also vary the kind of assets it purchased.

One channel through which quantitative easing worked in response to the financial crisis was by signalling to financial markets that interest rates were going to stay low.

But "that signalling channel has really exhausted its effect … Financial markets are no longer surprised about this type of policy," Macchierelli said.

"We do see a very strange thing happening which is uncertainty is very high but at the same time the risk premium stays low. We had a few spikes around March (when the Covid shock hit) but that is about it."